Commentary and musings on the complex, fascinating and peculiar world that is securities regulation

Monday, August 29, 2011

Council of Institutional Investors Urges Legislation Providing for Director Majority Voting to Complete what Dodd-Frank Began

In letters to the American Bar Association and the Delaware State Bar Association, the Council of Institutional Investors made a strong case for finishing the job begun by Dodd-Frank and enact legislation providing for majority voting in all director elections. The letters request that the associations support amendments to the Model Business Corporation Act and the Delaware General Corporation Law to replace the current default standard of plurality voting in uncontested elections with a majority vote standard. Specifically, the CII recommends that Section 216(3) of the Delaware corporation code be amended to provide for majority voting as the default standard in director elections. Currently, Section 216(3) provides that directors must be elected by a plurality of the votes of the shares present in person or represented by proxy.

A provision in the base text of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as approved by the Senate, would have required the SEC to direct national securities exchanges and associations to prohibit the listing of any security of an issuer who has on its board any members that did not receive a majority vote in uncontested board elections

While this provision was ultimately dropped from Dodd-Frank during the Conference Committee negotiations, the desire of investors for majority voting in uncontested elections of directors continues, noted the CII, and it is not inconceivable that such legislation could once again arise at the federal level.

The Senate provision, which was not in the House bill, would have required the SEC to adopt rules providing that in an uncontested election a director receiving a majority of the votes cast must be deemed to be elected. If a director failed to win a majority of the vote in an uncontested election, the director must tender his or her resignation to the board. Upon accepting the director’s resignation, the board must set a date on which the resignation will take effect in a reasonable period of time and publish such date within a reasonable period of time as established by SEC rule.

Under the Senate base text, dropped in conference, if the board declines to accept the resignation, the board must disclose the specific reasons why it decided not to accept the resignation and why that decision was in the best interest of the company and its shareholders. The SEC would have been authorized to exempt a company from any or all of these requirements based on the company’s size, its market capitalization, the number of shareholders of record, or any other criteria, as the Commission deemed necessary and appropriate in the public interest or for the protection of investors

In its letters, the Council said that its director election policy is based on the view, long accepted in the United Kingdom, Germany, and other European nations, that a plurality standard for the uncontested election of directors, under which a director may be elected even though a majority of shares are withheld from the nominee, is inherently unfair and undemocratic. The benefits of a majority vote standard are many, said the CII, including democratizing the corporate electoral process, enhancing investor voting power with minimal disruption to corporate affairs; and making boards more representative of, and accountable to, shareowners.

While a common criticism of majority voting is that it would result in frequent changes disruptive to corporate boards, said the Council, the data suggests a different reality. On average less than one percent of corporate directors are rejected by shareowner voting each year. The CII also believes that Dodd-Frank’s introduction of mandatory advisory votes on executive compensation beginning this proxy season appears to provide an alternate avenue for shareowners to express their discontent with directors.

More specifically, so far in the 2011 proxy season, only one company has had both a say-on-pay proposal and a director candidate fail to receive majority support, said the CII. Thus, the data appears to indicate that shareowners are discerning in how they voice disapproval of a corporation’s actions, noted the CII, thus making it highly unlikely that a binding majority vote standard would be disruptive to boards.